Dollar rises after Fed decision, data

Greenback sets 11-month high versus yen

By

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) — The dollar extended gains against the Japanese yen on Tuesday, touching its highest level since last April, and held onto an advance versus the euro, after the Federal Reserve noted shortcomings in the job market and housing sector while seeing improvement in business and household spending.

The ICE dollar index
DXY, +0.38%
which measures the greenback against a basket of six currencies, rose to 80.231, from 79.869 in late North American trading on Monday.

The dollar
USDJPY, +0.03%
reversed an early loss versus the yen to rise to 83.03 yen from ¥82.26 late Tuesday. It hasn’t closed above that level since April.

The euro
EURUSD, -0.0424%
fell to $1.3065, erasing gains notched in the Asian session and down from $1.3153 Monday.

Officials reiterated they expect rates to stay low until late 2014 and maintained its bond-purchase programs, according to a statement from the Federal Open Market Committee. See story on Fed statement.

“The Fed has tried hard to water down any slight tendency to be more hawkish in their economic descriptions, but the changes do leave a cumulative impact that is bearish bonds, positive for the U.S. dollar,” said Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.

Analysts widely expected the Fed to be a little more upbeat on the U.S. economy than at their last meeting in January. That would tend to support a growing sense that the central bank won’t look to pursue further monetary stimulus, which typically undercuts a currency. Read Fed preview.

“There is absolutely no sign that the Fed is backing off its stance,” said Andrew Wilkinson, chief economic strategist at Miller Tabak. Rather, in the statement the Fed is “recognizing that economic conditions are slightly better but not enough to shift its stance.”

The dollar gained earlier after a report showed U.S. retail sales rose in February, adding to reasons for Fed officials to back away from considering further easing measures. See story on retail sales.

“For the Fed, a strong retail sales number would reinforce the wait and see view that has begun to emerge among investors,” said Steven Englander, head of G-10 strategy at Citigroup. “The FOMC may remain open-minded with respect to whether the bounce will persist, but will have little incentive to make any comment. From an FX perspective this would continue to be dollar-yen positive.”

The euro received no benefit from a stronger-than-expected jump in the March ZEW indicator of German investor expectations. The index jumped to its highest level since June 2010, while the index measuring current conditions declined. Read about the March ZEW.

Westpac expects the euro to move back to $1.28 as “it’s not clear to us what could possibly drive sustainable gains in th euro from here,” analysts wrote in a note. “Most [European Union] stress indicators have normalized about as much as is realistically possible.”

Better U.S. economic data and a Fed on hold would also tend to push Treasury yields higher, making U.S. assets more attractive for overseas buyers to shift into the dollar, they noted. Indeed, Treasury yields rose Tuesday to their highest level in several months. Read about Treasury yields.

Bank of Japan

The Japanese yen lost ground against the dollar earlier as expectations for the Fed to back off on easing policy stood in contrast to forecasts that the Bank of Japan may still try to become more accommodative to combat deflation.

The dollar initially weakened versus the yen after the Bank of Japan unanimously decided to keep its key overnight call rate at 0% to 0.1%.

Japan is expected to gradually emerge from current flat growth to return to a path of moderate recovery, the central bank said alongside the decision.

It will increase the amount of loans available through its growth-supporting facility by 2 trillion yen ($24.35 billion), bringing the size of the program to 5.5 trillion yen. Read more on Bank of Japan.

The yen has fallen 7.5% against the dollar this year, after the Bank of Japan announced more asset buying and set an inflation target far above current levels.

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